Charts say we’re moving closer to a market top

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

With the market making new all-time highs this past week, we have followed the path laid out over the last few months quite well. Once we struck 1864 (on the S&P 500 Emini futures June contract) in May, we began looking higher toward 1990, where we called for a top in July, and began to look for a quick drop to the low 1900s. As the move developed, we were looking at the 1890ES level (September contract) as the lowest level we can hold to see a rally over 2000ES, and our bottom in August was 1890ES to the penny. From there, we have had a target of 2040 (on the December E-mini contract), which is 2048 in the cash index. If we are to continue to follow that plan, the market should be topping within the next few weeks, and providing us with an estimated 100-point drop to start with.

For the last several weeks, I have continually noted how important the 1966 support level on the December S&P 500 Emini futures contract
US:ESZ4
— formerly 1974 on the September contract — support level was to maintain immediate upside pressure to the 2040ES target. In fact, last weekend, I reiterated what I wanted to see early this past week to maintain the pressure toward 2040ES.

"We can still see weakness into the 1966ES region into Monday and finally touch the 1.00 extension, which is the standard Fibonacci Pinball target for wave iv in this structure. So, as long as we remain over the 1966ES level, I still need to be looking for wave V to show up to take us to our ultimate higher target. Therefore, wave 1 of V towards the all-time market high must show up early next week"

As we know, Sunday night the market dropped from 1978ES and bottomed at the 1968ES level — which clearly was over our 1966ES support level — and began a 5 wave, 29-point rally which topped on Wednesday at 1997ES, just under the all-time market highs.

Once we topped at 1997ES on Wednesday, I sent out a Wave Alert to provide direction to those who were not able to buy the lows earlier in the week:

“If wave 1 off the lows has truly completed, then the ideal pullback target for wave 2 is the 1984ES region. From there, we have a 2.00 extension up to the 2040 level, which is the ideal target for the top we have been looking towards since before we even bottomed at 1890ES - September contract. In this set up, wave i of 3 would target the prior market highs, and wave iii of 3 would take us through the prior market highs.”

In the trading room, I noted that once the market broke out of its downtrend channel to signal that it had begun wave v, it would normally come back down to retest the top of that downtrend channel. What I also noted was the confluence we had at the top of that downtrend channel, as it was the .500 retracement of the move off the lows. Later that day, the market dropped to 1983.25, and began the current rally off that level.

However, Friday's action was a bit troublesome, and may have placed some roadblocks before us in being able to attain 2040ES. In fact, due to the overlapping nature of Friday's action, we even have to begin to consider that the market may have topped prematurely. Although I do not like that potential just yet, I have to keep it in the back of my mind, should the market prove it next week.

But, unfortunately, it leaves us with an ending diagonal pattern to complete wave v to the 2040ES region. In this pattern, as long as we hold over the 1989-1995ES support region for the b-wave of 3, I am going to still expect a rally to take us to the 2020-2027ES region to complete wave 3 of this ending diagonal. From there, we will likely see another drop down in wave 4 of the ending diagonal, to be followed by a wave 5 up to the 2027-2040ES region to complete the rally off the August low.

Alternatively, should the market break down below the 1985ES region early this week, it provides early warning that the market may have topped in wave v, and a follow through below 1975/80ES will have me looking for a test of the 1940ES region. Please recognize that this is an alternative that must be proven before being adopted. We must continue to look higher toward our target until support breaks.

So the plan for the upcoming week is to be looking up toward 2027-2040ES as long as we maintain support over 1985-89ES. However, should the market break below 1985ES, it provides us with early warning that the market may have indeed topped prematurely, especially if we see strong follow through below 1975ES, which will have me potentially looking to test the 1943ES region next.

If you remember from prior analysis, it will take a strong break down below 1943ES to tell us that the 10%-plus correction is finally upon us, with our target between 1740-1840. However, until support is taken out, I will still be looking higher.

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